Final spectrum base price leaves operators fuming

The Union Cabinet on Friday heralded the beginning of a new regime for second generation (2G) telecom spectrum by fixing its auction base price at Rs 14,000 crore for five MHz — 22 per cent lower than sector regulator Trai’s recommendation of Rs 18,000 crore.

But, the industry remained unimpressed, noting that even the reduced base price would make it bleed. The Cabinet chose the lower option suggested by the EGoM (empowered group of ministers) on telecom under Finance Minister P Chidambaram, which had also recommended Rs 16,000 crore as an alternative base price. The base price for 800-MHz spectrum used by CDMA operators has been fixed at 1.3 times that of the 2G spectrum in 1,800 MHz.

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The decision was taken after four meetings of the EGoM under two ministers and despite vehement opposition from GSM operators who said it would lead to a steep increase in customer tariffs.

AT WHAT PRICE (Various pricing plans for5-MHz spectrum)

Rs 14,000 cr Price cleared by Cabinet

Rs 18,000 cr Sector regulator Trai's recommendation

Rs 16,000 cr Higher alternative base price proposed by EGoM

Base price for 800-MHz spectrum fixed at 1.3 times that of 2G spectrum in 1,800 MHz

USAGE CHARGES

Current spectrum usage charges to continue, operators to pay3-8% of revenues

Telecom operators were far from pleased with on Friday’s decision. Idea Cellular MD Himanshu Kapania said, “There is no business case. There was no business case at Rs 1,650 crore. Idea has been losing Rs 170 crore per quarter on Ebitda on new circles. So, there is definitely no business case at Rs 14,000 crore." A senior Vodafone India executive echoed the view. “The base price is very high. The reduction should have been 80 per cent and not what has been done. The metros and A circles will remain virtually out of reach for operators," he said.

The Cabinet also decided to continue with the existing regime for spectrum usage charges, which vary from three per cent to eight per cent (the average paid by the industry is four per cent) based on the amount of spectrum an operator has, rejecting the recommendation of the regulator to keep it at a uniform level of three per cent. The Cabinet deferred any decision on the other controversial issue of imposing a one-time spectrum charge on incumbent operators for their spectrum after the EGoM recommended it should wait till the Supreme Court hearing on the issue.

Communications Minister Kapil Sibal told reporters after the meeting, “In this environment, this is a firm signal from the government that India means business and its policies are in favour of investors. It is a signal we want to lower the reserve price." He said the government would appoint an auctioneer and the EGoM would meet on Monday to decide the auction process.

Reacting to the base price, Rajan S Mathews, director general of Cellular Operators Association of India, said, “The high reserve price can impact tariffs by 30 paise a minute and additional debt of around Rs 3,25,000 crore would have to be raised by telecom players to fund bids. Banks do not have that kind of bandwidth."

The impact of the Cabinet decision on government revenues might be neutral. While it will get less revenue from the auction than the expected Rs 50,000 crore based on the regulator’s calculation, it would be compensated by a higher average spectrum usage charge. For the two slots available for new operators in the GSM auction, at least three players — Telenor, Sistema and Reliance Industries — are expected to slug it out. Operators say many of them, like Telenor (expected to bid for only nine circles) or incumbent operator Idea Cellular (whose licences were cancelled in seven circles), would not go for pan-India bidding.

Most of the other new players whose licences were cancelled will stay away. These include STel, Etislatat-DB, Loop Telecom and, probably, Videocon, whose future plans are not clear. As a result, the industry would see substantial consolidation, with the number of players shrinking from an average of 12-13 per circle to at the most 9-10. The number of licences (277 currently) across the country will shrink to 221 after the auction. The number could go down further to seven or eight if the Supreme Court takes an adverse call on the future of 51 other licences issued before 2008.